Video: Calif. governor: We must make severe cuts

updated 7/21/2009 4:30:41 PM ET 2009-07-21T20:30:41

Gov. Arnold Schwarzenegger and California's legislative leaders have agreed on a plan to slice $26 billion from the state’s recession-ravaged budget, cuts that would hit the elderly and poor the hardest.

The governor and leaders from both parties announced the compromise late Monday after more than five hours of closed-door talks. If the agreement survives its run through both houses of the Legislature, it would provide temporary relief to an epic fiscal crisis that has captured national attention, sunk the state's credit rating and forced it to issue IOUs, and forced deep cuts in education and social services.

But it won’t solve the state’s budget problem. Most analysts and top lawmakers expect that California will face multibillion-dollar deficits into the foreseeable future as the economy struggles to recover and tax revenue lags far behind the level of the boom years.

Details of the agreement were not immediately released, but lawmakers familiar with it said it includes $15 billion in cuts. The rest of the deficit will be made up by a combination of borrowing, shifting money from other government accounts and accelerating the collection of certain taxes.

Thousands lose health insurance
The plan would end health care coverage for tens of thousands of seniors and children, cut several billion dollars in state assistance to local governments and possibly lead to the early release of thousands of convicted criminals. It also would tighten requirements for welfare and other social programs and cut $2 billion from the state’s higher-education system and $9.5 billion from its public schools, which would lose thousands of teachers and staff. The entire state workforce, except forest-fire crews and the California Highway Patrol, would face a mandatory three-day furlough each month.

To generate new revenue, the agreement also would allow new oil drilling off the Santa Barbara coast.

Schwarzenegger and Republican lawmakers refused to raise taxes any further, limiting lawmakers' options. Democrats had fought to preserve basic social services, including welfare, in-home support and health care for low-income children.

Despite the deep cutbacks required by the plan, the governor and lawmakers said the tough steps were necessary.

"We are very happy to have a basic agreement," Schwarzenegger told reporters after emerging from his office shortly before 7 p.m., with Democratic and Republican leaders of the Assembly and Senate at his side.

"We have closed the deficit. ... We have protected the safety net," said Assembly Speaker Karen Bass, D-Los Angeles.

February's useless budget
Declining tax revenues have rendered the budget useless since Schwarzenegger signed it in February during a rare emergency session of the Legislature.

Monday's announcement ended a little more than two weeks of intense negotiations that began shortly after the start of the fiscal year July 1, when the Legislature failed to pass interim steps that could have delayed the issuance of IOUs.

The state controller's office has been sending the pay-you-later warrants to thousands of state contractors and vendors that provide an array of state services. State finance officials hope a balanced budget will allow the state to obtain short-term loans to cover its daily expenses until most of the tax revenue arrives in the spring.

If it does get the loans, it would be able to stop sending IOUs, which have served as the most visible symbol of California's cash crisis and opened the state to ridicule. California last issued IOUs in 1992 and has done so only twice since the Great Depression.

Hallye Jordan, spokeswoman for state Controller John Chiang, said it was not immediately clear how quickly the state would stop issuing IOUs.

"We'll have to see what their assumptions are, stress-test those and assure that there is sufficient cash to pay off of the state's bills before we can stop issuing the IOUs," Jordan said. "It's going to depend on how much and how quickly cash comes into the state treasury."

Recession hits state hard
The state's ability to function by issuing IOUs to contractors was projected to last until early September without a balanced budget in place. Payments to the state pension funds and paychecks to state workers would have been in jeopardy beyond that point.

While California has been criticized for spending beyond its means, much of the current deficit can be traced to a steep economic downturn that has robbed the state of tax revenue.

Personal income fell this year in California for the first time in 70 years, leading to a 34 percent plunge in income tax revenue during the first half of the year.

The $26.3 billion shortfall amounts to roughly a quarter of the state's general fund, the account that pays for day-to-day state services. The sheer size of the deficit meant that any effort to balance the state's books would be felt throughout the state, from college students seeing a sharp increase in fees to local police and fire departments that face cuts as the state takes money from city and county governments.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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